The green deal – what’s not to like?

The Green Deal will fund energy saving work such as installing insulation with the coosts repaid through your electricity bill

The Green Deal finally saw the light of day last week – to be greeted with less enthusiasm than expected.

The Green Deal is the government’s long awaited flagship policy designed to reduce energy consumption in homes. It works by funding energy efficiency measures which are re-paid through the homeowners’ electricity bill. The ‘golden rule’ is that the cost of any repayments should never be greater than the saving in energy costs. You can find out more here.

The ‘Golden Rule’

In short, you pay nothing upfront, you reduce your energy use and some (or all) of that saving goes to re-pay the cost of whatever energy efficiency measures were installed. Once the Green deal loan is repaid, you get the full benefit of any energy savings. Moreover, the calculation is based on the savings you would make at current energy prices. If energy costs rise, your reduction in energy use will represent a bigger saving than estimated.

To qualify for the loan, you’ll need an authorised Green deal assessor to inspect your home and make recommendations on what you could do, how much it would cost and how much you would expect to save, so you should have sound analysis to base your decision on..

What’s not to like?

Rate of interest

Whatever you call it, the Green Deal is a loan and interest will be charged at something around seven per cent. If your energy efficiency measures cost £1,000 and are repaid over 10 years, the actual amount you pay in total will be in the region of £1,400.

So, the first question is; would you borrow the money to save energy from your bank? If not, why is it better to borrow it elsewhere and pay it back through your energy bill?

That is quickly followed by a second question; could you do the same thing cheaper by borrowing from your mortgage lender? With mortgage rates somewhere around the five per cent mark, the answer could well be yes – provided you have enough equity in your home.

Repayment term

Thirdly, the Golden Rule (that your repayments never exceed savings) can be achieved by extending the length of the loan. Quite a lot of things can be made to look affordable if you spread repayments over a long enough period. But whether you are paying for energy or to repay a loan doesn’t make a lot of difference to your wallet. The longer the repayment period, the less attractive it looks. The Energy Savings Trust and the British Property Federation have come up with some useful illustrations of costs and savings for different types of properties. you can see them here: Energy Efficiency and the Private Rented Sector Split

Save energy or greater comfort?

Fourthly, the Green Deal assumes that an improvement in energy efficiency will lead to a reduction in energy use. But that is not always the case. If your home has always been cold and damp, improvements to insulation might make it cosier, but that doesn’t mean that you will use less energy. You might use the same amount of energy and just enjoy a more comfortable home. In which case, your repayment of the Green deal loan is not offset by energy savings and you end up paying more.

Selling a home with a Green Deal in place

Finally, the loan is attached to the house, not the owner. That means that, if you decide to sell, any buyer will have to accept that they are taking on responsibility for the outstanding loan. That could make selling your house more complicated and there will be a temptation to pay off the loan before you put your home on the market. That’s all fine and well if you have the money to do so, but even then there could be exit fees for repaying the loan early. Don’t sign up unless you know what these would be or you are sure you are going to stay in the house until the loan is repaid.

Choosing an assessor

You may also need to be careful about choosing your Green Deal assessor. An independent assessor will expect to charge for their work – after all, it’s how they make their living. Since the deal is in its infancy, no-one knows exactly how much this charge might be, but it is likely to be between £100 – £200.

But some installers of energy efficient systems could offer a free Green Deal inspection. That’s all well and fine, but since the assessor is being paid by the installer, there’s a concern that the assessor might have a bias in favour of the energy saving systems offered by that installer. And that he or she might do that even if there were cheaper alternatives available.

Again, it’s too soon to tell what will happen – but it makes sense to check that your assessor is free to recommend any solution they think best in much the same way that independent mortgage advisers are free to suggest the best mortgage for you regardless of the lender.

In short, the case for the Green deal is not quite as clear cut as it might at first have seemed. Whether it is right for you will depend on your circumstances; could you get a cheaper loan elsewhere? are you thinking of moving soon?, how quickly will the savings will repay the costs?

Landlords – this is for you

There is one group, however, for whom the Green Deal could prove a godsend – landlords. New rules currently in development both north and south of the border are expected to set a minimum level of energy efficiency for residential homes before they can be let. The expectation is that property to rent must have at least an ‘E’ rating on an EPC by 2018. The Green Deal provides landlords with a relatively simply mechanism for funding these improvements through electricity bills which are normally the responsibility of the tenant.